Smoke and mirrors: inside the great private health insurance premium drama

by Stephen Duckett

Published by The Canberra Times, Wednesday 18 December

On the main stage is the political drama, played before the journalists, and through them, voters.

The script here is about how small the increase is, with the smaller the number, the more the outpouring of superlatives and the more flowery the scriptwriting.

In this drama there is good news: Health Minister Greg Hunt has announced the lowest premium increases in more than a decade. The increase has a ‘2’ in front of it – 2.92 per cent – in contrast to last year’s figure of 3.25 per cent, so all is good in this best of all possible worlds.

The prescribed formula for calculating the announced increase has an element of magic to it – the razzle dazzle of the theatre obscures the fact that certain products are excluded from the calculated increase, so the published numbers are closer to fiction than fact. This drama is a one act play, the big announcement shouting the good news before the news cycle caravanserai moves on, thus ensuring there is no serious analysis of the script.

The second stage is for the market analysts and shareholders. Here, actors in suits play on their calculators and with their spreadsheets in a soulless drama entirely about numbers, with no human characters.

Medibank Private and nib are now listed on the stock exchange and they must be concerned about how their premium increases are seen by the market. If there is no margin above benefit increases, investors will not be happy. So the analysts pour over each fund’s announcement, adjust the headline rate for “youth discounts” and make judgments about what it means for profit.

Accountability to “the market” means the listed funds can’t be quite as accommodating to ministerial pressure to moderate announced premium increases.

On the third stage the drama is about what happens when the hapless punters open their letters from their fund telling them what increase they will face next year. This is a world away from the main stage in time and results. Here the punters face the bad news; the smoke and mirrors of the main stage are replaced by sober reality. The Panglossian joy which was played out on the main stage is replaced by tragedy.

The announced headline rate increase is well above inflation and wages growth. The ring master, naturally enough, focuses on the headline rate of 2.92 per cent, but the three biggest funds – covering almost two-thirds of the insured population – all have approved increases above 3 per cent: BUPA at 3.26 per cent, Medibank at 3.27 per cent, and HCF at 3.39 per cent. The statistical magic of the media release on the main stage will disappear in a puff of smoke, leaving the punter literally facing the bill.

The play on the third stage is complicated by the fact that insurers are still moving their members to the various new product descriptors. Over the past decade the average consumer product has covered less than in the past (more exclusions), and the consumer faces a potential larger upfront payment (bigger excesses). Assuming the same trend applies for next year, then the effective premium increase – on a like-for-like basis, taking account of educed coverage and higher excesses -will be more than the announced 2.92 per cent.

The third stage is where the real action is. It doesn’t matter what happens on the main stage, an announcement with a two in front of it will not translate into a consumer’s experience. Most will turn over the thimble and find a pea with a three in front of it.

Consumers will find it hard to afford the extra money to pay for the premium increases, and the youth exodus from private health insurance will continue. The underlying industry dynamics of an ageing membership, increased hospital use, and higher health prices will dance across the third stage, heralding a tale of higher premium increases in the future with the macabre death spiral moving to centre stage.